S&P 100® options bring an added dimension to stock market investing by giving you the ability to trade and invest on an entirely different level. Instead of requiring you to focus on specific stocks, S&P 100 options allow you to trade a large segment of the domestic stock market with a single transaction.

To provide investors with added flexibility in managing large-cap U.S. equity exposure, a number of S&P 100 options are now offered:

• Since 1983 investors have used cash-settled S&P 100 options (ticker symbol OEX, with American-style exercise) to adjust their equity portfolio exposure. More than one billion OEX options have been traded, making the OEX one of the most popular equity portfolio management tools in history.
• In February 2001 options on iSharesSM S&P 100 (ticker symbol OEF, with American-style exercise) were introduced.
• In July 2001 the CBOE is introduced cash-settled S&P 100 options (ticker symbol XEO) with European-style exercise. Some investors prefer this European-style feature, which means that XEO may be exercised only on the day just prior to expiration, and therefore XEO is not subject to the uncertainties involved with possible early exercise.
• Investors wishing to mange long-term exposure can use 1/5 value OEX LEAPS® or full-value XEO LEAPS®.

Bullish, bearish, and neutral investors can all use S&P 100 options to reflect their individual opinions of the S&P 100 market. You can trade index options for profit or protection, with opportunities to adjust for up, down or unchanging markets. The S&P 100 has established itself firmly as an active investment tool. This popularity stems from four fundamental reasons for using the broad market-based S&P 100:

Investors are able to trade a broad market by making one S&P 100 trading decision rather than making the many decisions involved with investing in numerous individual stocks.

Purchasing S&P 100 options, instead of buying or selling numerous individual stocks, provides an investor with an additional opportunity to use investment capital elsewhere. For a relatively small percentage gain in the underlying index, an S&P 100 option can increase in value by a multiple of that gain, assuming the correct option series was selected.

The Standard & Poor's 100 Index is a capitalization-weighted index based on 100 highly capitalized stocks from a broad range of industries. More than one billion S&P 100 options contracts have been traded since the CBOE launched the trading of options on the OEX, the first cash-settled securities product, on March 11, 1983. On November 24, 1997, the index had a 2-for-1 split.

For some examples of strategies on options on the S&P 100 Index, please click on any of the following:
OEF Bullish -- Buy OEF Calls
OEX OEX Bear Put Spread
XEO Bullish -- XEO Short Put Spread

For more information on some of the many ways in which listed options can help you manage your equity portfolio, please visit:
http://www.cboe.com/strategies/
http://www.cboe.com/protection

The S&P 100 Index (ticker symbol OEX) is a capitalization-weighted index, covering a broad range of industries. Each OEX index option contract represents 100 times the current value of the Index. For example, when the Index is at 600, the dollar value the index options will cover will equal $60,000 (or 100--the multiplier--times 600).

The OEX was created by the Chicago Board Options Exchange (CBOE) and originally represented the top 100 stocks that traded on the CBOE in 1983. However, Standard & Poor's now manages the S&P 100 and is responsible for the addition and deletion of securities.

Users of S&P 100 index options fall in two broad categories: institutional asset managers and traders, and individual investors.

Individual investors who use S&P 100 options cover a broad spectrum, from conservative blue-chip investors to more aggressive stock market traders. However, depending upon your particular financial goals and investment objectives, S&P 100 options may or may not be right for you. You should seek professional investment advice; please consult with your broker and/or financial advisor before you invest in S&P 100 options.

S&P 100 option contracts are a proven financial instrument, with an established and active market. S&P 100 options are traded only at the Chicago Board Options Exchange, the world's first and largest options exchange. S&P 100 options are cleared by the Options Clearing Corporation, which has received a triple-A credit rating. More than one billion S&P 100 contracts have been traded since the CBOE launched the trading of OEX, the first cash-settled securities product, on March 11, 1983.

Prior to 2001, S&P 100 options were American-style only. This means they can be exercised on any business day prior to expiration date. However, most other index options are European-style, meaning that they may be exercised only during a specified period of time just prior to its expiration. In 2001 the CBOE is introducing European-style S&P 100 options (XEO), so that customers will be offered both American- and European-style S&P 100 options. S&P 100 options, available in each of the four nearby months, expire on a monthly basis. The expiration date is the Saturday following the third Friday of the expiration month. Settlement value is tied to the S&P 100 at expiration or to the value of the Index when the option is exercised. This value is calculated by Standard and Poor's. OEX options are cash-settled. This means that cash is delivered at settlement, not securities.

The index is calculated by the Standard & Poor's Corporation and is capitalization-weighted. This means that it gives greater weight to those stocks with greater market value. The market value is determined by multiplying the number of shares outstanding by the price per share.

The market value of all of the stocks in the index are added together and divided by a "divisor", the result is the current value of the S&P 100 Index. Capitalization weighting allows for the index to accurately reflect the performance of the market's largest and most popular stocks.

No, OEX is not the Dow Jones Industrial Average! Both are popular indexes and do share many stocks, but they differ significantly in composition and weighting and therefore differ in movement. The Dow consists only of 30 large industrial stocks and is a price-weighted index. This means that the prices of the 30 stocks are totalled and then divided by a divisor. The S&P 100, which OEX represents, consists of 100 blue-chip stocks and is capitalization-weighted. This means that the index reflects the performance of 100 of the market's largest and most popular stocks. These differences can cause the two indexes to differ significantly in terms of movement. Over a long-range period of time they have moved in a similar pattern, but on a day-to-day basis they can vary substantially.

The performance of OEX has a high correlation with the S&P 500 Index (SPX), which is the institutional benchmark for the domestic equity market.

The five largest stocks (in terms of weighting) for some of the key CBOE stock index products are shown in the tables below. While the OEX, SPX, and NDX look to stock market capitalization for weighting (and stocks such as GE, Microsoft, and Exxon have surpassed $300 billion in market capitalization), the Dow Jones Industrial Average (DJX) is price-weighted and gives more weight to stocks with higher prices.

Although the value of your OEX options is based on the value of the S&P 100 Index, you will not receive, or have to deliver, stocks if you exercise the options. You will receive cash if the option has value at expiration. This is known as cash-settlement. This is a key difference between index options and equity options. Equity options can be exercised as a means to buy or sell the underlying stock. The process is different with index options because they are cash-settled. When an OEX option is exercised, the holder receives the in-the-money amount in cash.

Symbol:
XEO (Index overflow symbols -- XEK, XEP, XET, XOE)

Underlying:
The Standard & Poor's 100 Index is a capitalization-weighted index of 100 stocks from a broad range of industries. The component stocks are weighted according to the total market value of their outstanding shares. The impact of a component's price change is proportional to the issue's total market value, which is the share price times the number of shares outstanding. These are summed for all 100 stocks and divided by a predetermined base value. The base value for the S&P 100 Index is adjusted to reflect changes in capitalization resulting from mergers, acquisitions, stock rights, substitutions, etc.

Multiplier:
$100.

Strike Price Intervals:
Strike prices are listed with minimum intervals of 5 points. Strike prices are listed in 10-point intervals in the far-term months.

Strike (Exercise) Prices:
In-, at- and out-of-the-money strike prices are initially listed. New series are generally added when the underlying trades through the highest or lowest strike price available.

Premium Quotation:
Stated in decimals, one point equals $100. Minimum tick for series trading below $3 is 0.05 ($5.00) and for all other series, 0.10 ($10.00).

Expiration Date:
Saturday following the third Friday of the expiration month.

Last Trading Day:
Trading in XEO options will ordinarily cease on the business day (usually a Friday) preceding the expiration date.

Expiration Months:
Up to four near-term months plus up to one month on the March quarterly cycle.

Exercise Style:
European - XEO options generally may be exercised only on the last business day before expiration.

Settlement of Option Exercise:
The exercise-settlement value, OEX, is calculated using the last (closing) reported sales price in the primary market of each component stock on the last business day before the expiration date. If a stock in the index does not open on the day on which the exercise & settlement value is determined, the last reported sales price in the primary market will be used in calculating the exercise-settlement value. The exercise-settlement amount is equal to the difference between the exercise-settlement value, OEX, and the exercise price of the option, multiplied by $100. Exercise will result in delivery of cash on the business day following expiration.

Position Limit:
No position and exercise limits are in effect. Each member (other than a market-maker) or member organization that maintains an end of day position in excess of 100,000 contracts in XEO for its proprietary account or for the account of a customer shall report certain information to the Department of Market Regulation. The member must report information as to whether such position is hedged and, if so, a description of the hedge employed. A report must be filed when an account initially meets the aforementioned applicable threshold. Thereafter, a report must be filed for each incremental increase of 25,000 contracts. Reductions in an options position do not need to be reported. However, any significant change to the hedge must be reported.

Margin:
Purchases of puts or calls with 9 months or less until expiration must be paid for in full. Writers of uncovered puts or calls must deposit / maintain 100% of the option proceeds* plus 15% of the aggregate contract value (current index level x $100) minus the amount by which the option is out-of-the-money, if any, subject to a minimum for calls of option proceeds* plus 10% of the aggregate contract value and a minimum for puts of option proceeds* plus 10% of the aggregate exercise price amount. Additional margin may be required pursuant to Exchange Rule 12.10.

(*For calculating maintenance margin, use option current market value instead of option proceeds.)

Trading Hours: 8:30 a.m. to 3:15 p.m. Central Time (Chicago time).

One measure of the level of implied volatility in index options is CBOE's Volatility Index, known by its ticker symbol VIX. VIX, introduced by CBOE in 1993, measures the volatility of the U.S. equity market. It provides investors with up-to-the-minute market estimates of expected volatility by using real-time OEX index option bid/ask quotes. This index is calculated by taking a weighted average of the implied volatilities of eight OEX calls and puts. The chosen options have an average time to maturity of 30 days. Consequently, the VIX is intended to indicate the implied volatility of 30-day index options. It is used by some traders as a general indication of index option implied volatility. Implied volatility levels in index options change frequently and substantially. Consequently, when trading short-term index options, traders should forecast the index level, the time period, and the volatility level. Traders of long-term index options should also include a forecast of interest rates.



For more information and data on volatility indexes click here.

At the launch of the OEF options, CBOE Chairman and CEO William J. Brodsky said: "OEF options offer investors a cost-efficient way to participate in the performance of the top 100 companies in the United States. The deep, liquid markets found at the world's largest options exchange make CBOE the ideal marketplace for this exciting new product."

OEF options trade like stock options, are American-style exercise, are settled by physical delivery, and trade in decimals. The options trade in the OEX trading pit from 8:30 a.m. to 3:15 p.m. CST.

For more on iSharesSM S&P 100 (OEF) please:
See the attached iShares S&P 100 pamphlet
See the attached iShares prospectus.
Visit http://www.cboe.com/icontact/
Visit the Exchange-traded Funds section of the Index Workbench

For some an example of an OEF strategy, see OEF Bullish -- Buy OEF Calls

What a portfolio manager says -

"Our firm has been managing reduced-risk accounts hedged with S&P 100 index options for more than 15 years. The introduction of the iShares S&P 100 provides us with added flexibility and risk management opportunities. It's an advantage for us that, throughout the day, we can buy and sell iShares -- passive basket investments that can lower our basis risk and transaction costs."

Walter Sall
Chairman of Gateway Investment Advisers
manages $2.3 billion in assets.

For more information on S&P 100 options, please visit http://www.cboe.com/oex, or click on the attached paper in PDF format.